1. In the United States, which of the following forms of taxation currently

represents the largest source of tax revenue for the federal government?

A. Property tax

B. Sales tax

C. Corporate income tax

D. Personal income tax

Key

D

2. Which of the following is a policy tool of the Federal Reserve?

A. Raising or lowering income taxes

B. Increasing or decreasing unemployment benefits

C. Buying or selling government securities

D. Increasing or decreasing government spending

Key

C

VIDEO ARCADE RENTAL FEES AND SALES

Name of

Game

Machine

Rental Fee

per Month

(in dollars)

Sales

per Month

(in dollars)

DanceHopper

1,800

2,200

MaxiBlast

1,200

2,100

FantasyRing

800

1,500

RaceCarRoute

400

1,200

3. The owner of a video arcade pays a monthly rental fee for each video-game

machine. She wants to add an additional game to the arcade.

Based on the information above, which video-game machine gives the arcade

owner the greatest incentive to place it in her arcade?

A. DanceHopper

B. MaxiBlast

C. FantasyRing

D. RaceCarRoute

Key

B

4. How will an increase in real interest rates affect the amount of money that people

will borrow? Explain why this will occur.

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Scoring Guide

Score & Description

Correct

Student (A) states that people will borrow less and (B) provides a correct explanation for why (a rise in real interest rates makes it more expensive for people to borrow).

Partially Correct

Student states that either (A) people will borrow less OR (B) a rise in real interest rates makes it more expensive for people to borrow. NOTE: If response has incorrect effect, it will NOT receive credit for the explanation.

Incorrect

Response is wholly incorrect.

5. If there were a decrease in the worldwide production of oil, which of the following

would most likely occur?

A. Global consumption of oil would increase.

B. Economic growth in oil-importing countries would decrease.

C. International spending on research into alternative energy sources would decrease.

D. Global exploration for new oil reserves would decrease.

Key

B

6. An increase in the rate of inflation will result in a decrease in which of the following?

A. Federal and state income taxes

B. The purchasing power of money

C. The level of prices

D. Interest rates

Key

B

7. Two countries are currently trading with each other. The countries agree to

remove all trade restrictions on products traded between them. Which of the

following is most likely to decrease?

A. The variety of goods available

B. The prices of imported goods

C. The quality of goods available

D. The amount of imported goods

Key

B

8. Describe two economic factors that help explain why one country may produce

more goods and services per capita than another country does.

1)

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2)

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Scoring Guide

Score & Description

Correct

The student’s response includes reference to two of the factors listed below.

Partially Correct

The student’s response includes reference to only one of the factors listed below.

The response gives one potential economic risk and one potential economic benefit.

Partially Correct

The response gives either one potential economic risk OR one potential economic benefit.

Incorrect

The response gives no acceptable economic risk or benefit.

22. A profit-maximizing company that manufactures sports clothing wants to spend

$25 million to have a professional athlete appear in commercials for its clothing.

Which of the following is the best economic reason for the company to spend

the money?

A. The company sells $25 million worth of clothing per year.

B. The company could cover the cost of the athlete’s contract with profits from

previous years.

C. The additional revenue generated by the commercials would be greater than

the additional costs of producing the clothing.

D. The additional revenue generated by the commercials would be greater than

$25 million plus the costs of producing the additional clothing.

Key

D

23. Willie loves ice-cream cones. He has found a store that sells ice-cream cones

at a bargain price of $0.50 each. He has just eaten two of these cones but has

decided not to buy a third one. Which of the following statements best explains

the economic principle at work in Willie’s decision not to buy a third cone?

A. Consumers weigh the additional costs and benefits before buying

more goods.

B. Consumers spend freely to increase business activity so that the price

of goods will drop.

C. Consumers save more by buying larger quantities.

D. Consumers buy more at lower prices.

Key

A

24. Because Country A has no domestic sources of wood, it imports all its wood from

wood-producing countries. If the price of wood in wood-producing countries rises

substantially, which of the following is most likely to occur?

A. Country A will import more wood to meet rising demand.

B. Country A will impose a tariff on wood imports.

C. Housing prices in Country A will increase as wood imports become

more expensive.

D. Profits in other wood-producing countries will increase because of

increased exports to Country A.

Key

C

25. Which of the following has been most important in reducing poverty over time?

A. Taxes

B. Economic growth

C. International trade

D. Government regulations

Key

B

26. Given the conditions presented in the headline above, what is likely to happen to

spending in the economy? Explain your answer.

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What is the relationship between spending and output in this situation?

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What is likely to happen to real gross domestic product as a result of the

relationship between spending and output?

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Scoring Guide

Score & Description

Superior

The response states the following information: (A) Spending would decrease because income is falling; (B) Because spending is decreasing businesses will cut output; and (C) This relationship will lead to a reduction in real gross domestic product.

Satisfactory

Response answers two of three parts.

Minimal

Response answers one of three parts.

Incorrect

Response is incorrect.

27. Suppose that the government set the price of chocolate at $6 per pound. Which of

the following statements best describes an effect of this price control?

A. There would be a surplus of 40 pounds of chocolate.

B. Less chocolate would be demanded at $4 than at $6.

C. Producers of chocolate would want the price set at $4.

D. There would be a shortage of 20 pounds of chocolate.

Key

A

28. If the government removes the price control of $6, what will be the price and

quantity sold of chocolate?

Price

Quantity Sold

(in pounds)

A.

$6

40

B.

$5

60

C.

$5

100

D.

$4

80

Key

B

29. Other than wages, what are two issues commonly addressed by collective

bargaining between labor unions and employers?

A. Amount of stock to issue and selection of union leaders

B. Corporate image and company location

C. Fringe benefits and work rules

D. Selection of corporate leaders and advertising

Key

C

30. Tom has $1,000 that he can either spend now or deposit into a bank account.

The account pays a fixed rate of interest per year and does not allow withdrawal

for two years. List two economic factors that Tom should consider in making

his decision.

1)

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2)

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Scoring Guide

Score & Description

Correct

The student lists at least two of the factors listed below.

– The inflation rate estimated for the next two years

– The interest rate paid on the savings account

– The uses to which Tom could put the $1,000 if it is not put into savings

– The tax liability associated with earned interest

– Alternative investments, such as stocks and bonds

– Concern about the risks associated with investments

– Need for the money within the two year time horizon

– The compounding of interest

– Opportunity cost

– Need for additions to wealth for retirement or other purposes

– Concern for future expenses

– Consider penalty fee for early withdrawal

Partially Correct

The student lists one factor.

Incorrect

The student does not suggest any factors to be considered in the decision.

31. Which of the following fiscal policy combinations would a government most likely

follow to stimulate economic activity when the economy is in a severe recession?

is 4 percent. Which of the following is most likely to happen to Jennifer’s

financial situation?

A. She will have more income to spend and greater purchasing power.

B. She will have more income to spend and less purchasing power.

C. Her cost of living and her purchasing power will decrease.

D. Her cost of living and her purchasing power will increase.

Key

B

33. Which of the following actions does the United States federal government

commonly take to finance a budget deficit?

A. Printing more money

B. Imposing import quotas

C. Borrowing from the public

D. Expanding public-works projects

Key

C

34. The most basic measure of the money supply in the United States consists of

which of the following?

A. Gold certificates, silver certificates, and precious metals

B. Treasury bills, Treasury notes, and Treasury bonds

C. Credit card accounts, charge accounts, and savings accounts

D. Checking account deposits, paper currency, and coins

Key

D

35. Which of the following is true of people with poor credit histories?

A. They will earn higher rates of interest on savings accounts than people with

good credit histories.

B. They will earn lower rates of interest on savings accounts than people with

good credit histories.

C. They will be charged higher rates of interest on loans than people with good

credit histories.

D. They will be charged lower rates of interest on loans than people with good

credit histories.

Key

C

36. What happens to most of the money deposited in checking accounts at a

commercial bank?

A. It is used to pay the bank’s expenses.

B. It is loaned to other bank customers.

C. It is kept in the bank’s vault until depositors withdraw the funds.

D. It is paid to owners of the bank as return on their investment.

Key

B

NXTX INCORPORATED

Number of

Workers

Total Revenue

per Day

10

$1,000

11

$1,250

12

$1,325

13

$1,385

14

$1,400

37. NXTX Incorporated currently has 10 workers. It would like to expand and hire

more workers. Each additional worker will cost the company $100 per day.

According to the information in the table above, how many workers in total

should NXTX Incorporated employ to maximize its profits?

A. 11

B. 12

C. 13

D. 14

Key

A

38. Country X and Country Y have similar populations and natural resources. Which

of the following best explains why Country X would have a higher rate of

economic growth than Country Y?

A. Country X invests more in education.

B. Country X imports more consumer goods.

C. Country X places higher taxes on businesses.

D. Country X pays larger salaries to government officials.

Key

A

39. Sandra and Miriam are the same age. Sandra’s parents deposited $10,000 into

a college savings account in the year she was born. Miriam’s parents deposited

$10,000 into a college savings account when she was 14. There were no additional

deposits or withdrawals from either account, and both accounts have earned an

8 percent rate of interest, compounded annually, each year.

Which student will have more money in her college savings account at age 18?

Explain by giving two reasons why this would occur.

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Scoring Guide

Score & Description

Correct

The response should include all of the following:

(A) Sandra will have more money in the account than Miriam because Sandra’s account was earning interest for a longer time than the other account (Miriam’s).

(B) The accounts also have grown because of compound interest. Not only did the original $10,000 in Sandra’s account earn interest for a longer time, but the interest payments earned further interest, which added to the difference between the accounts.

Partially Correct

The response identifies Sandra as having more money in the account and provides one explanation for why this is so.

OR

The content of the response would get full credit (score of 3) but the names are reversed. This is a situation in which the student loses one point but the error is carried forward to the second part of the question.

Incorrect

The response merely states that Sandra’s account will have more money without a correct explanation.

OR

No relevant answer provided.

40. Which of the following groups would most likely be hurt financially by

unexpected inflation?

A. People who are borrowing money at fixed rates of interest

B. Purchasers of land who are speculating on price increases

C. Retirees who are living on a fixed income

D. Workers with a cost-of-living adjustment clause in their contracts

Key

C

41. Recently, the hourly wage that parents are willing to pay babysitters increased

dramatically. Higher pay will most likely cause which of the following changes in

how babysitters divide their out-of-school time between babysitting and other

activities?

Time Spent

Babysitting

Time Spent

on Other Activities

A.

No change

Decrease

B.

Increase

Decrease

C.

Decrease

No change

D.

Increase

Increase

Key

B

42. Which of the following is the best measure for comparing the material standard

of living among people in different nations?

A. Imports and exports per capita

B. Real gross domestic product per capita

C. Consumer price index

D. Real interest rates

Key

B

43. Suppose that the federal government initially has a balanced budget. Which of the

following changes in government tax revenues and expenditures over time will

definitely lead to an increase in the national debt?

Tax Revenue

Expenditures

A.

Increase

No change

B.

Increase

Decrease

C.

Decrease

Increase

D.

No change

Decrease

Key

C

44. After a festival, food vendors leave behind a great deal of garbage. Other than

telling the vendors to clean up the garbage, what is one policy the city can adopt

to reduce the amount of garbage left by food vendors at future festivals?

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How will this policy affect both the supply of foods offered during future festivals

and the price of these foods?

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Scoring Guide

Score & Description

Superior

Student response includes all three of the following:

(A) A description of one of the following policies the city can

implement:

– Fine for vendor—give vendor a ticket

- Limit number of vendors

- Tax

- Registration fee/cleanup fee

- Security deposit

– Refundable fee/deposit

- Not allowed to return next year if leave garbage

(B) A statement that the supply will decrease (fewer food vendors,

limited supply of food)

(C) A statement that the price will increase

Satisfactory

Student response includes

(A) and (B) as listed above

OR

(A) and (C)

OR

(B) and (C)

Minimal

Student response includes

(A) or (B) or (C)

Incorrect

No appropriate response

45. James borrows $10,000 from the bank. By the time the loan is repaid, James has

paid the bank $10,400. What does the additional $400 represent?

A. Inflation rate

B. Purchasing power of money

C. Interest

D. Investment

Key

C

46. When people’s incomes increase, the demand for roses and the price of roses are

most likely to change in which of the following ways?

Demand for Roses

Price

A.

Decrease

Decrease

B.

Decrease

Increase

C.

Increase

Decrease

D.

Increase

Increase

Key

D

47. How do federal income taxes and transfer payments, such as unemployment

compensation, affect the distribution of personal income in the United States

after taxes and transfers?

A. Federal income taxes make the distribution of income more equal, but

transfers make it less equal.

B. Federal income taxes make the distribution of income less equal, but

transfers make it more equal.

C. Both federal income taxes and transfers make the distribution of income

less equal.

D. Both federal income taxes and transfers make the distribution of income

more equal.

Key

D

INFLATION RATE DATA

Year of Inflation

Contract Rate

1 2.0%

2 4.0%

48. Mr. Ricardo’s labor union negotiated a two-year contract that included an annual

wage increase of 3 percent. Given the inflation data in the chart above, answer

the following questions.

How did Mr. Ricardo’s real income change during the first year of the contract?

Explain your answer.

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How did Mr. Ricardo’s real income change during the second year of the contract?